The Gist: Oily E&Ps are finding it harder to beat capital efficiency targets the way they did a few years back.
Programming Note: There will be no post on July 4th. I will see everyone next week! Have a great holiday.
Dodd-Frank may have ruffled feathers on Wall Street, but every financial crisis invites regulatory oversight—and Section 953(a) was one of the more constructive regulations to emerge after the Great Financial Crisis.
This rule forced public companies to connect executive pay with actual performance, introducing more transparency. Before this, compensation discussions were often vague and subjective. Starting in 2011, disclosures became more detailed—just as the shale boom kicked off.
Back in the shale boom days, it was all about growth. Continental Resources—one of the Bakken pioneers—had 70% of executive bonuses linked to production and reserve expansion from 2012 to 2014.
Today, the script has flipped. Capital discipline—not volume—is now the primary metric driving executive pay. A clear sign of how industry priorities have evolved.
Most companies select 5 to 8 KPIs for annual incentive plans. But too many objectives can dilute focus—often signaling a lack of clear strategic priorities.
Take Pioneer Natural Resources—now acquired—as an example. These were the KPIs its board prioritized in 2022.
Perform better than the target set by the board, and named executive officers (NEOs) earn higher annual bonuses—and vice versa.
At Pioneer Natural Resources, profit-based KPIs like Free Cash Flow (FCF) and return-focused metrics such as ROCE and Cash Return on Capital Invested were structured so that outperformance relative to targets led to bonus upside.
Conversely, for cost KPIs—like base lease operating expenses (LOE) and G&A per BOE—as well as capital spending metrics covering drilling, completions, and facilities, the goal was to come in below target. Lower spending meant higher compensation.
One KPI in Pioneer’s 2022 proxy stood out: capital spending. Its weighting dropped from 20% the prior year to just 10%—and actual capex came in at $3.82 billion versus a target of $3.45 billion. As a result, executives received no annual bonus tied to that metric.
Zooming out across the major oily E&Ps still standing today, the trend is consistent: the weighting toward capital spending KPIs peaked around 25% in 2021 and has since flattened or declined slightly.
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